Not everyone should be able to file bankruptcy and successfully receive a discharge. At least that is what this Fifth Circult Court case holds.

The main holding of this case is that a debtor's bad faith in the bankruptcy process can serve as the basis for a dismissal of the case for cause under Section. 707(a) of the Bankruptcy Code, even if the bad faith conduct that the debtor engaged in could arguably be used to form the basis of an objection to discharge, or objection to the dischargeability of a debt, or something else.

And according to the Court, the bad faith conduct can be either before or during the bankruptcy case. Matter of Krueger, 5th Cir. 2016

And the facts were pretty bad in this case. At least according to the opinion, the debtor's "actions formed a concerted scheme to use the bankruptcy process as both a shield from legitimate state court actions and a sword to retake control of (a corporation)."

The Court noted that the record "is replete with evidence that (the Debtor) filed bankruptcy for illegitimate purposes, misled the court and other parties, and engaged in bare-knuckle litigation practices, including lying under oath and threatening witnesses." 

Among a litany of other bad acts, the court pointed out that during a break in a bankruptcy court hearing, the Debtor approached another witness and said "You're next, buddy. I'm going to sue the s___ out of you." 

The Court held that "Courts have broad authority to determine what is cause for dismissal under Section 707(a): cause is any reason cognizable to the equity power and conscience of the court as constituting an abuse of the bankruptcy process. (cites omitted). This can include "prepetition bad faith conduct," postpetition bad faith conduct, or petitions that simply serve no legitimate bankruptcy purpose.

The bankruptcy trial court granted a motion to dismiss for cause and imposed a two-year refiling ban on the Debtor. The Debtor appealed to the district court unsuccessfully and the Fifth Circuit affirmed the lower courts. Opinion by Circuit Judge Edith Jones.

I don't always agree with Judge Jones' take on cases, but there has to be a remedy for debtors that manipulate the system. And to believe the facts of this case, this debtor was doing a pretty good job of manipulating the system. 

What do you think? Should courts have such wide-ranging authority to dismiss bankruptcy cases? Please leave your comments or questions below.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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